================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 333-36379
PACIFICHEALTH LABORATORIES, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 22-3367588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Matawan Road, Suite 420
Matawan, NJ 07747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 739-2900
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [_]
At May 12, 2004, there were 10,240,545 shares of common stock, par value $.0025
per share, of the registrant outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
---------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003.......................................3
Statements of Operations (Unaudited) for the three months ended
March 31, 2004 and March 31, 2003..................................................................4
Statements of Cash Flows (Unaudited) for the three months ended
March 31, 2004 and March 31, 2003..................................................................5
Notes to Financial Statements...............................................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................8
ITEM 3. CONTROLS AND PROCEDURES..............................................................................11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................11
ITEM 2. Changes in Securities and Use of Proceeds.....................................................11
ITEM 3. Defaults Upon Senior Securities...............................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................11
ITEM 5. Other Information.............................................................................11
ITEM 6. Exhibits and Reports..........................................................................12
SIGNATURES..........................................................................................................12
2
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
ASSETS
March 31, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
Current assets:
Cash and cash equivalents $ 1,182,901 $ 1,798,703
Accounts receivable, net 1,740,011 669,300
Inventories 1,024,941 738,062
Prepaid expenses 222,171 191,859
------------ ------------
Total current assets 4,170,024 3,397,924
Property and equipment, net 99,302 60,307
Patents 155,251 155,251
Deposits 19,320 10,895
------------ ------------
Total assets $ 4,443,897 $ 3,624,377
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 625,479 $ 470,145
Accounts payable and accrued expenses 1,044,618 376,693
------------ ------------
Total current liabilities 1,670,097 846,838
------------ ------------
Stockholders' equity:
Common stock, $.0025 par value; authorized
50,000,000 shares; issued and outstanding:
10,240,545 shares at March 31, 2004 and
10,188,545 shares at December 31, 2003 25,601 25,471
Additional paid in capital 15,776,424 15,788,068
Accumulated deficit (13,028,225) (13,036,000)
------------ ------------
2,773,800 2,777,539
------------ ------------
Total liabilities and stockholders' equity $ 4,443,897 $ 3,624,377
============ ============
3
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
(UNAUDITED)
2004 2003
----------- ----------
Revenues:
Net product sales $ 2,303,597 $1,397,779
Cost of goods sold: 1,129,815 719,721
----------- ----------
Gross profit 1,173,782 678,058
Selling, general and administrative expenses 1,093,694 997,703
Research & development expenses 38,372 87,291
Depreciation expense 9,509 14,117
----------- ----------
1,141,575 1,099,111
----------- ----------
Net operating income (loss) 32,207 (421,053)
----------- ----------
Other income (expense)
Interest income 2,601 944
Interest expense (27,031) (994)
----------- ----------
(24,430) (50)
----------- ----------
Income (loss) before income taxes 7,777 (421,103)
Provision (benefit) for income taxes - -
----------- ----------
Net income (loss) $ 7,777 $ (421,103)
=========== ==========
Basic and diluted income (loss) per share $ 0.00 $ (0.07)
=========== ==========
Weighted average common shares - Basic 10,218,688 6,115,170
=========== ==========
Weighted average common shares - Diluted 10,993,993 6,115,170
=========== ==========
4
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
(UNAUDITED)
2004 2003
----------- ---------
Cash flows from operating activities:
Net income (loss) 7,777 (421,103)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 9,509 14,117
Intrinsic value of stock options granted 14,369 5,824
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (1,070,711) (362,080)
Decrease (Increase) in inventories (286,879) 466,957
Decrease (Increase) in prepaid expenses (30,312) (4,475)
Decrease (Increase) in deposits (8,425) (45,733)
Increase (Decrease) in accounts payable/accrued expenses 667,925 165,403
Increase (Decrease) in other current liabilities - (16,149)
----------- ---------
Net cash used in operating activities (696,747) (197,239)
----------- ---------
Cash flows from investing activity:
Purchase of fixed assets (48,505) (1,865)
----------- ---------
Net cash used in investing activity (48,505) (1,865)
----------- ---------
Cash flows from financing activities:
Issuance of notes payable 1,210,103
Repayments of notes payable (1,054,768) (21,035)
Common stock issued 42,750 -
Fees in connection with private placement (68,635) -
Common stock options/warrants exercised - 1,060
----------- ---------
Net cash used in financing activities 129,450 (19,975)
----------- ---------
Net decrease in cash (615,802) (219,079)
Cash, beginning balance 1,798,703 628,436
----------- ---------
Cash, ending balance $ 1,182,901 $ 409,357
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 27,031 $ 994
=========== =========
5
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions for Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31,
2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004. The unaudited financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2003.
2. REVENUE RECOGNITION
Approximately $750,000 in sales of new products in the first quarter of
2004 is subject to a right of return provision if certain minimum levels
of retail sales are not achieved by the customer in a 12-month period of
time from the date of initial sale. Management believes these minimums
will be met based upon initial retail sales of the product reported by the
customer as well as the Company's past history with similar products such
as ENDUROX R4 in similar channels of distribution.
3. INVENTORIES
As of March 31, 2004 and December 31, 2003, inventories consisted of the
following:
2004 2003
---- ----
Raw Materials $ 75,715 $ 14,841
Packaging supplies 58,262 33,127
Finished goods 890,964 690,094
---------- --------
$1,024,941 $738,062
========== ========
4. STOCK BASED COMPENSATION
The Company granted 12,000 Incentive Stock Options (ISOs) to employees
during the first three months of 2004 with exercise prices ranging from
$0.83 to $0.95 per share. 1,000 of these options vested upon grant, 5,500
of these options vest during the first quarter of 2005, and 5,500 of these
options vest during the first quarter of 2006. The exercise price for all
12,000 options was equal to the fair market value of the common stock on
the date of grant. Since the Company accounts for its options under APB
No. 25, no compensation expense was recognized.
The Company also granted 11,000 stock options to consultants during the
first three months of 2004. All 11,000 options vested upon grant with
exercise prices ranging from $0.83 per share to $0.90 per share. These
options were determined to have a value of $7,289 for the three months
ended March 31, 2004 and this amount was charged to operations and added
to paid-in capital in accordance with SFAS 123. In addition, 10,000
options issued to consultants expired during the first three months of
2004.
The following table illustrates the effect on net (loss) income and
earnings per share if the fair value based method had been applied to all
awards:
6
Quarter Ended March 31,
2004 2003
-------- ---------
Reported net (loss) income $ 7,777 $(421,103)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects - 0 - - 0 -
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (42,802) (65,973)
-------- ---------
Pro forma net (loss) income $(35,025) $(487,076)
======== =========
Basic and diluted (loss) per share:
As reported $0.00 ($0.04)
Pro forma ($0.00) ($0.04)
5. INCOME TAXES
The Company has approximately $12,013,000 in Federal net operating loss
carryovers that were generated through March 31, 2004 and are available to
offset future taxable income in calendar years 2004 through 2024.
The components of the Company's deferred tax assets as of March 31, 2004
and December 31, 2003 are as follows:
2004 2003
---- ----
Net operating loss carry forwards $ 4,830,000 $ 4,830,000
Deferred charges - -
Valuation allowance (4,830,000) (4,830,000)
------------- -----------
Deferred tax asset $ - $ -
6. NOTES PAYABLE
Included in notes payable at March 31,2004 is $587,410 payable to USA
Funding. During the second quarter of 2003, the Company secured a $750,000
revolving asset-based credit facility from USA Funding of Dallas, TX. This
facility is for one year commencing on June 1, 2003. The amount of
available credit is based on the value of the Company's eligible
receivables from time to time. Eligible receivables include those
receivables that have payment terms equal to or less than net 45 days or
have been outstanding for less than 90 days. The receivables are financed
with recourse. This credit facility bears interest at a rate of prime plus
2% as well as a 0.75% discount rate on all advances.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains forward-looking statements concerning our
financial condition, results of operations and business, including, without
limitation, statements pertaining to:
o The development of new products and the expansion of the market
for our current products;
o Implementing aspects of our business plans;
o Financing goals and plans;
o Our existing cash and whether and how long these funds will be
sufficient to fund our operations; and
o Our raising of additional capital through future equity
financings.
These and other forward-looking statements are primarily in the section
entitled "Management's Discussion and Analysis of Financial Conditions and
Results of Operations". Generally, you can identify these statements because
they use phrases like "anticipates," "believes," "expects," "future," "intends,"
"plans," and similar terms. These statements are only predictions. Although we
do not make forward-looking statements unless we believe we have a reasonable
basis for doing so, we cannot guarantee their accuracy, and actual results may
differ materially from those we anticipated due to a number of uncertainties,
many of which are unforeseen. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including those stated in this
Report.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are unable to
predict accurately or over which we have no control. Cautionary language in this
Report provides examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements.
(A) INTRODUCTION
The Company was incorporated in April 1995 as a nutrition technology
company that researches, develops, and commercializes functionally unique
proprietary products for sports performance, weight loss and Type 2 diabetes.
SPORTS PERFORMANCE
------------------
Our first sports performance product, ENDUROX(R), was introduced in
March 1996 with commercial sales beginning in May 1996. In March 1997, we
extended the ENDUROX line of products with ENDUROX EXCEL(R). In February 1999,
we introduced ENDUROX(R) R(4)(R) Performance/Recovery Drink to be taken
following exercise. In clinical studies performed or funded by the Company,
ENDUROX R(4) has demonstrated a number of exercise-related benefits including
enhanced performance, extended endurance, and decreased post-exercise muscle
damage. In June 2001, we introduced ACCELERADE(R) Sports Drink, to be taken
during exercise using the same patented technology as ENDUROX R(4). Research
studies funded by the Company have shown that ACCELERADE is significantly better
than conventional sports drinks in improving endurance during exercise. In 2003,
the Company introduced a ready-to-drink form of ACCELERADE into test market in
the state of Colorado. This test market is expected to continue in 2004. In
March 2004, the Company introduced COUNTDOWN(R), the first product specifically
engineered for immediate post-workout intake by strength-training athletes.
8
WEIGHT LOSS
-----------
In weight loss, the Company has focused its research and development
efforts on development of novel nutritional compositions that stimulate the
body's major satiety peptide, or cholecystokinin (CCK). In April 2000, we
introduced our first weight loss product, SATIETROL(R), a natural appetite
control product based on this research. Clinical studies performed or funded by
the Company have shown that Satietrol, a pre meal beverage, can reduce hunger up
to 43% 3 1/2 hours after eating. In January 2001, we extended our weight loss
product line with the introduction of SATIETROL COMPLETE(R), a 220-calorie meal
replacement product that incorporates the patented SATIETROL technology. In June
2001, the Company signed an exclusive worldwide Licensing Agreement with
GlaxoSmithKline ("GSK") for its SATIETROL technology. Under the Agreement, the
Company received an initial payment of $1,000,000 and received a subsequent
milestone payment of $250,000. GSK subsequently canceled the Licensing Agreement
in September 2002 with all rights reverting to the Company. In the third quarter
of 2003, the Company funded clinical studies performed at a private research
firm that showed a statistically significant reduction in caloric intake in
overweight individuals using a new improved form of SATIETROL in both beverage
and tablet form. The Company will conduct additional studies on SATIETROL in
2004.
TYPE 2 DIABETES
---------------
Type 2 diabetes has become the fastest growing chronic condition in the
United States. Obesity and poor glucose regulation appear to be primary
characteristics of this condition. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. The Company's
research in this area is to develop a nutritional product that can help Type 2
diabetics lose weight by controlling appetite while improving glucose
regulation. The Company expects to initiate clinical trials on a product for use
by Type 2 diabetics in the future.
(B) RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 VS. MARCH 31, 2003
We recorded a net income of $7,777 or $0.00 per share for the three
months ended March 31, 2004 compared to a net loss of ($421,103) or ($0.07) per
share for the three months ended March 31, 2003. The net income for the
three-month period ended March 31, 2004 vs. the net loss in the same period in
2003 is due primarily to increased revenues as detailed below.
Revenues in the three-month period ended March 31, 2004 increased 64%
to $2,303,597 from $1,397,779 for the same period in 2003. Revenues of ENDUROX
R(4) increased 8% and revenues of ACCELERADE increased 23% in the three months
ended March 31, 2004 compared to the same period in 2003. The first quarter of
2004 also included significant opening orders for the Company's new COUNTDOWN
post-workout drink for the strength-training athlete.
Approximately $750,000 in sales of new products in the first quarter of
2004 is subject to a right of return provision if certain minimum levels of
retail sales are not achieved by the customer in a 12-month period of time from
the date of initial sale. Management believes these minimums will be met based
upon initial retail sales reported by the customer of the product as well as the
Company's past history with similar products such as ENDUROX R4 in similar
channels of distribution.
Gross profit was $1,173,782 for the three months ended March 31, 2004
compared to $678,058 for the three months ended March 31, 2003 due to the
aforementioned increased revenues. For the three months ended March 31, 2004,
gross profit margin was 51.0% compared to 48.5% for the three months ended
9
March 31, 2003. The primary reason for the increase in gross profit margin was
due to slotting fees paid in the form of product for getting our ACCELERADE
product sold in 900 Rite Aid drug stores that feature a special nutrition
section in the first quarter of 2003.
Selling, general, and administrative ("S, G, & A") expenses increased
to $1,093,694 for the three-month period ended March 31, 2004 from $997,703 for
the three-month period ended March 31, 2003. S, G, & A expenses increased due
primarily to increases in advertising and marketing expenses associated with the
launch of our new COUNTDOWN product for the strength-training athlete.
Research and development expenses were $38,372 for the three months
ended March 31, 2004 compared to $87,291 for the three months ended March 31,
2003. The decrease was due to research and development expenses in the first
quarter of 2003 associated with the test market of the ready-to-drink form of
our ACCELERADE product. We anticipate research and development expenses will
increase as we conduct additional clinical trials on all of our products as we
continue to seek out additional patents and claims for our products.
Interest expense was $27,031 for the three months ended March 31, 2004
compared to $1,000 for the three months ended March 31, 2003. The increase is
due to our accounts receivable funding described in the Liquidity section below.
(C) LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company's current assets exceeded its current
liabilities by approximately $2.5 million with a ratio of current assets to
current liabilities of approximately 2.5 to 1. At March 31, 2004, cash on hand
was $1,182,901, a decrease of $615,802 from December 31, 2003, primarily because
of an increase of $1,070,711 in accounts receivable and an increase in inventory
of $286,879 from December 31, 2003. These were offset by an increase in accounts
payable/accrued expenses of $667,925 from December 31, 2003. Accounts
receivable, inventory, and accounts payable increased in support of the
increased revenues.
During the second quarter of 2003, the Company secured a $750,000
asset-based credit facility from USA Funding of Dallas, TX. The amount of
available credit is based on the value of the Company's eligible receivables
from time to time. This credit facility bears interest at a rate of prime plus
2% as well as a 0.75% discount rate on all advances. At March 31, 2004, we had
approximately $13,000 of availability under this credit facility and, as of May
12, 2004, we had approximately $100,000 of availability under this credit
facility.
Because of our ability to borrow against our credit facility as
described above and the equity raised in the 2003 private placements, we believe
we have sufficient cash availability to fund all of our planned activities for
at least the next twelve months. We may seek to raise additional equity capital
in order to take advantage of any potential opportunities that may present
themselves.
(D) OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between the Company and any
other entity that have, or are reasonably likely to have, a current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
10
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of March 31, 2004, the end of the
period covered by this report, the Company's chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(A), (B) CHANGES IN SECURITIES:
None.
(C) RECENT SALES OF UNREGISTERED SECURITIES:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
31.1 Section 302 Certification of Robert Portman, Chief Executive
Officer.
31.2 Section 302 Certification of Stephen P. Kuchen, Chief
Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(B) REPORTS ON FORM 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFICHEALTH LABORATORIES, INC.
By: /S/ STEPHEN P. KUCHEN
------------------------------
STEPHEN P. KUCHEN
Vice President (Principal Financial Officer and
Principal Accounting Officer)
Date: MAY 14, 2004
-------------------
12